Financial 'advisers' face limited rules

Wall St. brokers likely to escape SEC oversight

By

MichaelCollins

SAN FRANCISCO (CBS.MW) -- The big Wall Street brokerages made great efforts to re-cast the people we once called brokers as financial advisers. But they don't want them regulated as advisers -- and unfortunately, the SEC is playing along.

If you're an investment adviser, you fall under the Investment Advisers Act of 1940. The law requires detailed disclosure of payments you receive and other possible conflicts of interest, limits the way you can advertise and requires specific consent of a client before you act as a principal in a securities transaction. You're considered to have a fiduciary duty to your client and expected to act in the client's best interest before your own interest - or your firm's.

Most registered representatives of broker-dealers -- the people we used to just call stockbrokers -- have traditionally been subject to other regulations, but exempt from the Advisers Act, because they were considered to be in the business of selling securities and making transactions, with investment advice "solely incidental" to their real business.

But in recent years the business has changed. Discount brokers and technology made it possible for investors to buy and sell securities at a fraction of the cost of a traditional brokerage commission, while regulatory and legal pressure narrowed the bid-ask spreads that were so profitable to broker-dealers in transactions.

The industry knew it had to change, and embarked on a makeover.

No longer do you speak to a broker at a Merrill Lynch or Morgan Stanley -- they now call their registered reps "financial advisers." Their advertisements emphasize financial planning and advice, with buying and selling securities only part of a package. They still sell -- but they encourage fee-based accounts, usually based on a percentage of your assets, rather than payment of commissions for every transaction.

The SEC and consumer groups (and The Gadfly) applauded the move to more fee-based accounts, hoping they would help eliminate some of the conflicts of interest between a broker and client. They aren't for everyone, but they made sense for a lot of people.

So, now that brokers are advisers, it's only fair that they be regulated as advisers, right? Ah, if only it were that logical.

The Wall Street broker-dealers lobbied hard to keep their exemption from the advisers act, and in fact to institutionalize it in a new SEC rule. It's informally known as the Merrill rule because Merrill Lynch pushed so hard for it. The SEC published the proposed rule for comment in November 1999, and earlier this month a top SEC official said making it final was on the commission's priority list.

It defies logic and language to call a registered rep a financial adviser in ads, and to stress advice and other financial services in practice -- and then to turn around and claim the advisers shouldn't be regulated as advisers. But the SEC is going along with it, and unless investors and consumer groups can get the regulators to change their minds the Merrill rule will probably become final later this year -- shortly after the new SEC chairman is confirmed. In the meantime, the SEC is operating like it is already in place and making no effort to get brokerages' financial advisers to comply with the advisers act.

Good brokers always knew they had to do well by their clients, and most consider they have a duty to act in the customer's best interest -- whether the regulations require it or not. It's a shame the brokerages aren't willing to stand up and make a legal and regulatory commitment to put their clients' interests first -- because it's going to take more than changing the name tags from "broker" to "adviser" to change the industry's image.

You can find the proposed rule, Release No. 34-42099, on the SEC Web site (http://www.sec.gov/rules/proposed/34-42099.htm). The official comment period is long past, but letting the commission know what you think still isn't a bad idea. You can comment through the Web site, or write to Jonahan Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington DC 20549.

Michael Collins writes on consumer and investor issues for CBS MarketWatch. Comments in The Gadfly don't necessarily represent the opinion of CBS.MarketWatch.

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